Reg. § 1.1503(d)-6 Exceptions to the domestic use limitation rule.
(a) In general
(1) Scope and purpose This section provides certain exceptions to the domestic use limitation rule of . of this section provides an exception for bilateral elective agreements. of this section provides rules regarding an exception that applies when there is no possibility of a foreign use. through of this section provide rules for an exception where a domestic use election is made. of this section provides rules with respect to triggering events, and of this section provides rules regarding exceptions to triggering events. of this section provides rules with respect to the annual certification reporting requirement. of this section provides rules regarding the recapture of dual consolidated losses. Finally, of this section provides rules regarding the termination of domestic use agreements and the annual certification requirement.
(2) Absence of foreign affiliate or foreign consolidation regime The absence of a foreign affiliate or a foreign consolidation regime alone does not constitute an exception to the domestic use limitation rule. This is the case because it is still possible that all or a portion of the dual consolidated loss may be put to a foreign use. For example, there may be a foreign use with respect to an affiliate acquired in a year subsequent to the year in which the dual consolidated loss was incurred. In addition, a foreign use may occur in the absence of a foreign consolidation regime through a sale, merger, or similar transaction. See Example 2.
(3) Foreign insurance companies treated as domestic corporations The exceptions contained in this section shall not apply to losses of a foreign insurance company that is a dual resident corporation under , or to losses attributable to any separate unit of such foreign insurance company. In addition, these exceptions shall not apply to losses described in the preceding sentence that, subject to the rules of , carry over to a domestic corporation pursuant to a transaction described in section .
(b) Elective agreement in place between the United States and a foreign country
(1) In general The domestic use limitation rule of shall not apply to a dual consolidated loss to the extent the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner, as the case may be, elects to deduct the loss in the United States pursuant to an agreement entered into between the United States and a foreign country that puts into place an elective procedure through which losses in a particular year may be used to offset income in only one country. This exception shall apply only if all the terms and conditions required under such agreement are satisfied, including any reporting or filing requirements. See for the effect of an agreement described in this paragraph on a stand-alone domestic use agreement.
(2) Application to combined separate units This applies where two or more individual separate units are treated as one combined separate unit pursuant to , and an agreement described in of this section would apply to at least one of the individual separate units. In such a case, and except to the extent provided in the agreement, the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner, as the case may be, may apply the agreement to the individual separate units, as applicable, provided the terms and conditions of the agreement are otherwise satisfied. See Example 19.
(c) No possibility of foreign use
(1) In general The domestic use limitation rule of shall not apply to a dual consolidated loss if the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner, as the case may be—
(i) Demonstrates, to the satisfaction of the Commissioner, that no foreign use (as defined in ) of the dual consolidated loss occurred in the year in which it was incurred, and that no foreign use can occur in any other year by any means; and
(ii) Prepares a statement described in of this section that is attached to, and filed by the due date (including extensions) of, its U.S. income tax return for the taxable year in which the dual consolidated loss is incurred. See Examples 2, 30, and 31.
(2) Statement The statement described in this must be signed under penalties of perjury by the person who signs the tax return. The statement must be labeled “No Possibility of Foreign Use of Dual Consolidated Loss Statement” at the top of the page and must include the following items, in paragraphs labeled to correspond with the items set forth in through of this section:
(i) A statement that the document is submitted under the provisions of of this section.
(ii) The name, address, taxpayer identification number, and place and date of incorporation of the dual resident corporation, and the country or countries that tax the dual resident corporation on its worldwide income or on a residence basis, or, in the case of a separate unit, identification of the separate unit, including the name under which it conducts business, its principal activity, and the country in which its principal place of business is located. In the case of a combined separate unit, such information must be provided for each individual separate unit that is treated as part of the combined separate unit under .
(iii) A statement of the amount of the dual consolidated loss at issue.
(iv) An analysis, in reasonable detail and specificity, of the treatment of the losses and deductions composing the dual consolidated loss under the relevant facts. The analysis must include the reasons supporting the conclusion that no foreign use of the dual consolidated loss can occur as described in of this section. The analysis must be supported with official or certified English translations of the relevant provisions of foreign law. The analysis may, for example, be based on the taxpayer's interpretation of foreign law, on advice received from local tax advisers in an opinion, or on a ruling from local country tax authorities. In all cases, however, the determination must be made to the satisfaction of the Commissioner.
(d) Domestic use election
(1) In general The domestic use limitation rule of shall not apply to a dual consolidated loss if an election to be bound by the provisions of through of this section is made by the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner, as the case may be (elector). In order to elect such relief, an agreement described in this (domestic use agreement) must be attached to, and filed by the due date (including extensions) of, the U.S. income tax return of the elector for the taxable year in which the dual consolidated loss is incurred. The domestic use agreement must be signed under penalties of perjury by the person who signs the return. If dual consolidated losses of more than one dual resident corporation or separate unit requires the filing of domestic use agreements by the same elector, the agreements may be combined in a single document, but the information required by and of this section must be provided separately with respect to each dual consolidated loss. The domestic use agreement must be labeled “Domestic Use Election and Agreement” at the top of the page and must include the following items, in paragraphs labeled to correspond with the following:
(i) A statement that the document submitted is an election and an agreement under the provisions of of this section.
(ii) The information required by of this section.
(iii) An agreement by the elector to comply with all of the provisions of through of this section, as applicable.
(iv) A statement of the amount of the dual consolidated loss at issue.
(v) A certification that there has not been, and will not be, a foreign use (as defined in ) during the certification period (as defined in ).
(vi) A certification that arrangements have been made to ensure that there will be no foreign use of the dual consolidated loss during the certification period, and that the elector will be informed of any such foreign use of the dual consolidated loss during such period.
(vii) If applicable, a notification that an excepted triggering event under of this section has occurred with respect to the dual consolidated loss within the taxable year in which the loss is incurred. See of this section for notification of excepted triggering events occurring during the certification period.
(2) No domestic use election available if there is a triggering event in the year the dual consolidated loss is incurred Except as otherwise provided in this section, if a dual resident corporation or separate unit incurs a dual consolidated loss in a taxable year and a triggering event, as described in of this section, occurs (and no exception applies) with respect to the dual consolidated loss in such taxable year, then the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner, as the case may be, may not make a domestic use election with respect to such dual consolidated loss and the loss will be subject to the domestic use limitation rule of . See Examples 5 through 7. See also for rules that eliminate a dual consolidated loss after certain transactions.
(e) Triggering events requiring the recapture of a dual consolidated loss
(1) Events Except as provided under paragraphs (e)(2) (rebuttal of triggering events) and (f) (exceptions to triggering events) of this section, if there is a triggering event described in this with respect to a dual consolidated loss of a dual resident corporation or a separate unit during the certification period (as defined in ), the elector will recapture and report as ordinary income the amount of such dual consolidated loss as provided in of this section on its tax return for the taxable year in which the triggering event occurs (or, when the triggering event is a foreign use of the dual consolidated loss, the taxable year that includes the last day of the foreign taxable year during which such use occurs). In addition, the elector must pay any applicable interest charge required by of this section. For purposes of this section, any of the following events shall constitute a triggering event:
(i) Foreign use A foreign use (as defined in ) of the dual consolidated loss. See for exceptions to foreign use.
(ii) Disaffiliation An affiliated dual resident corporation or affiliated domestic owner that incurred directly or through a separate unit, respectively, a dual consolidated loss that is subject to a domestic use election, ceases to be a member of the consolidated group that made the domestic use election. For purposes of this , an affiliated dual resident corporation or affiliated domestic owner shall be considered to cease to be a member of the consolidated group if it is no longer a member of the group within the meaning of , or if the group ceases to exist (for example, when the group no longer files a consolidated return). See Example 34. Any consequences resulting from this triggering event (for example, recapture of a dual consolidated loss) shall be taken into account on the tax return of the consolidated group for the taxable year that includes the date on which the affiliated dual resident corporation or affiliated domestic owner ceases to be a member of the consolidated group. This shall not apply to an acquisition described in where the consolidated group that includes the affiliated dual resident corporation or affiliated domestic owner, as applicable, is treated as remaining in existence.
(iii) Affiliation An unaffiliated dual resident corporation or unaffiliated domestic owner becomes a member of a consolidated group. Any consequences resulting from this triggering event (for example, recapture of a dual consolidated loss) shall be taken into account on the tax return of the unaffiliated dual resident corporation or unaffiliated domestic owner for the taxable year that ends at the end of the day on which such corporation becomes a member of the consolidated group.
(iv) Transfer of assets Fifty percent or more of the dual resident corporation's or separate unit's gross assets (measured by the fair market value of the assets at the time of such transaction or, for multiple transactions, at the time of the first transaction) is sold or otherwise disposed of in either a single transaction or a series of transactions within a twelve-month period. See Examples 5 and 35 through 37. In determining whether fifty percent or more of such assets is sold or otherwise disposed of, any dispositions occurring in the ordinary course of the dual resident corporation's or separate unit's trade or business shall be disregarded. In addition, for purposes of this , an interest in another separate unit and the shares of a dual resident corporation shall not be treated as assets of a separate unit or a dual resident corporation.
(v) Transfer of an interest in a separate unit Fifty percent or more of the interest in a separate unit (measured by voting power or value at the time of such transaction, or for multiple transactions, at the time of the first transaction) of the domestic owner, as determined by reference to such domestic owner's percentage interest on the last day of the taxable year in which the dual consolidated loss was incurred, is sold or otherwise disposed of either in a single transaction or a series of transactions within a twelve-month period. See Examples 5 and 35 through 37.
(vi) Conversion to a foreign corporation An unaffiliated dual resident corporation, unaffiliated domestic owner, or hybrid entity an interest in which is a separate unit, that incurred the dual consolidated loss, becomes a foreign corporation (for example, as a result of a reorganization or an election to be classified as a corporation under ).
(vii) Conversion to a regulated investment company, a real estate investment trust, or an S corporation An unaffiliated dual resident corporation or unaffiliated domestic owner elects to be a regulated investment company pursuant to section , a real estate investment trust pursuant to section , or an S corporation pursuant to section .
(viii) Failure to certify The elector fails to file a certification with respect to a dual consolidated loss as required under of this section.
(ix) Cessation of stand-alone status In the case of a dual consolidated loss that is subject to the stand-alone exception described in , the conditions described in are no longer satisfied. See Example 18.
(2) Rebuttal
(i) General rule An event described in of this section shall not constitute a triggering event if the elector demonstrates, to the satisfaction of the Commissioner, that there can be no foreign use (as defined in ) of the dual consolidated loss during the remaining certification period by any means. See of this section for rules regarding the termination of domestic use agreements and annual certifications following rebuttals under this general rule.
(ii) Certain asset transfers An event described in of this section shall not constitute a triggering event if the elector demonstrates, to the satisfaction of the Commissioner, that the transfer of assets did not result in a carryover under foreign law of the dual resident corporation's, or separate unit's, losses, expenses, or deductions to the transferee of the assets. For purposes of this determination, the exception to foreign use in shall be taken into account. Following rebuttal under this , the domestic use agreement continues in effect.
(iii) Reporting In order to satisfy the requirements of or of this section, the elector must prepare a statement, labeled “Rebuttal of Triggering Event” at the top of the page, that indicates that it is submitted under the provisions of this . The statement must include the information described in and of this section. The statement must also include the information described in of this section that supports the conclusions under or of this section, as applicable. The statement must be attached to, and filed by the due date (including extensions) of, the elector's income tax return for the taxable year in which the presumed triggering event occurs.
(iv) Examples See Examples 32 and 33.
(f) Triggering event exceptions
(1) Continuing ownership of assets or interests The following events shall not constitute triggering events, requiring the recapture of the dual consolidated loss under of this section:
(i) Disaffiliation as a result of a transaction described in section 381 An affiliated dual resident corporation or affiliated domestic owner ceases to be a member of a consolidated group solely by reason of a transaction in which a member of the same consolidated group succeeds to the tax attributes of the dual resident corporation or domestic owner under the provisions of section .
(ii) Continuing ownership by consolidated group This applies when assets of an affiliated dual resident corporation, or assets of, or interests in, a separate unit of an affiliated domestic owner are sold or otherwise disposed of. In such a case, the sale or disposition shall not be treated as a triggering event to the extent the assets or interests are acquired by one or more members of the consolidated group that includes the affiliated dual resident corporation or affiliated domestic owner, or by a partnership or a grantor trust, but only if immediately after the acquisition more than 90 percent of the partnership's or grantor trust's interests is owned, directly or indirectly, by members of such consolidated group.
(iii) Continuing ownership by unaffiliated dual resident corporation or unaffiliated domestic owner This applies when assets of an unaffiliated dual resident corporation, or assets of, or interests in, a separate unit of an unaffiliated domestic owner, are sold or otherwise disposed of. In such a case, the sale or disposition shall not be a triggering event to the extent such assets or interests are acquired by the unaffiliated dual resident corporation, or unaffiliated domestic owner, as applicable, or by a partnership or grantor trust, but only if immediately after the acquisition more than 90 percent of the partnership's or grantor trust's interests is owned, directly or indirectly, by the unaffiliated dual resident corporation or unaffiliated domestic owner. For example, this applies when an unaffiliated domestic owner acquires direct ownership of the assets of a separate unit that it had immediately before owned indirectly through a partnership.
(2) Transactions requiring a new domestic use agreement
(i) Multiple-party events If all the requirements of of this section are satisfied, the following events shall not constitute triggering events requiring the recapture of the dual consolidated loss under of this section:
(A) An affiliated dual resident corporation or affiliated domestic owner becomes an unaffiliated domestic corporation or a member of a new consolidated group (other than in a transaction described in of this section).
(B) Assets of a dual resident corporation or assets of, or interests in, a separate unit, are sold or otherwise disposed of in a transaction in which such assets or interests are acquired by an unaffiliated domestic corporation, one or more members of a new consolidated group, or by a partnership or grantor trust, but only if immediately after the sale or disposition more than 90 percent of the partnership's or grantor trust's interests is owned, directly or indirectly, by the unaffiliated domestic owner or by members of a new consolidated group, as applicable. See the related exception to foreign use provided under . See also Examples 36 and 37.
(ii) Events resulting in a single consolidated group If the requirements of of this section are satisfied, the following events shall not constitute triggering events requiring the recapture of the dual consolidated loss under of this section:
(A) An unaffiliated dual resident corporation or unaffiliated domestic owner becomes a member of a consolidated group.
(B) A consolidated group ceases to exist as a result of a transaction described in (relating to acquisitions of the common parent of the consolidated group), other than a transaction in which any member of the terminating group, or the successor-in-interest of such member, is not a member of the surviving group immediately after the terminating group ceases to exist. See Example 34.
(iii) Requirements
(A) New domestic use agreement The unaffiliated domestic corporation or new consolidated group (subsequent elector) must file an agreement described in of this section (new domestic use agreement). The new domestic use agreement must be labeled “New Domestic Use Agreement” at the top of the page, and must be attached to and filed by the due date (including extensions) of, the subsequent elector's income tax return for the taxable year in which the event described in or of this section occurs. The new domestic use agreement must be signed under penalties of perjury by the person who signs the return and must include the following items:
(1) A statement that the document submitted is an election and agreement under the provisions of of this section.
(2) An agreement to assume the same obligations with respect to the dual consolidated loss as the unaffiliated dual resident corporation, unaffiliated domestic owner, or consolidated group, as applicable, that filed the original domestic use agreement (original elector) with respect to that loss. In such a case, obligations of an elector provided under this section shall also be considered to be obligations of a subsequent elector.
(3) In the event of a transaction described in section involving the subsequent elector, an agreement to treat any potential recapture amount under of this section with respect to the dual consolidated loss as unrealized built-in gain for purposes of section , subject to any applicable exceptions (for example, the threshold requirements under section ). The potential recapture amount treated as unrealized built-in gain under this may be reduced to the extent permitted by of this section.
(4) In the case of a multiple-party event described in of this section, an agreement to be subject to the rules provided in of this section.
(5) The name, U.S. taxpayer identification number, and address of the original elector and prior subsequent electors, if any, with respect to the dual consolidated loss.
(B) Statement filed by original elector In the case of a multiple-party event described in of this section, the original elector must file a statement that is attached to and filed by the due date (including extensions) of its income tax return for the taxable year in which the event occurs. The statement must be labeled “Original Elector Statement” at the top of the page, must be signed under penalties of perjury by the person who signs the tax return, and must include the following items:
(1) A statement that the document submitted is an election and agreement under the provisions of of this section.
(2) An agreement to be subject to the rules provided in of this section.
(3) The name, U.S. taxpayer identification number, and address of the subsequent elector.
(3) Certain transfers qualifying for the de minimis exception to foreign use If a transaction or event qualifies for the de minimis exception to foreign use described in , the transaction or event shall not constitute a triggering event under paragraph (e)(1)(iv) (transfers of assets) or (v) (transfers of an interest in a separate unit) of this section. For purposes of the preceding sentence, the transaction or event shall include deemed transfers that occur as a result of the transaction or event. See, for example, deemed transfers occurring pursuant to Rev. Rul. 99-5 (1999-1 CB 434), see , and section and the related regulations. See also Example 5. This only applies if the entire transaction or event qualifies for the de minimis exception to foreign use. For example, if a domestic owner sells five percent of a separate unit to a foreign corporation, which would qualify for the de minimis exception to foreign use if it were the only transfer, but pursuant to the same transaction also sells 70 percent of the same separate unit to another corporation in a manner that results in a triggering event under of this section, this paragraph shall not apply to prevent the transaction from resulting in a triggering event.
(4) Deemed transactions as a result of certain transfers that do not result in a foreign use The rules in this apply where the assets of, or the interests in, a separate unit are transferred in a transaction that would not result in a foreign use and, but for resulting deemed transactions or events, would not result in a triggering event described in of this section. For purposes of this , deemed transactions or events shall include transactions or events that are deemed to occur pursuant to Rev. Rul. 99-5 and section and the related regulations. In such a case, the deemed transactions shall not result in a triggering event under paragraph (e)(1)(iv) (transfers of assets) or (v) (transfers of an interest in a separate unit) of this section. See also Example 35.
(5) Compulsory transfers Transfers of the assets or stock of a dual resident corporation, or of the assets or interests in a separate unit, shall not constitute a triggering event (including a foreign use that occurs as a result of, or following, the transfer) if such transfers are—
(i) Legally required by a government of a country as a necessary condition of doing business in the country;
(ii) Compelled by a genuine threat of immediate expropriation by a government of a country; or
(iii) The result of the expropriation of assets by a government of a country.
(6) Subsequent triggering events Any triggering event described in of this section that occurs subsequent to one of the transactions described in this , and that itself does not meet any of the exceptions provided in this , shall require recapture under of this section by the elector or subsequent elector, as applicable.
(g) Annual certification reporting requirement Unless and until the domestic use agreement is terminated pursuant to of this section, the elector must file a certification, labeled “Certification of Dual Consolidated Loss” at the top of the page, that is attached to, and filed by the due date (including extensions) of, its income tax return for each taxable year during the certification period. The certification must provide that there has been no foreign use of the dual consolidated loss. The certification must identify the dual consolidated loss to which it pertains by setting forth the elector's year in which the loss was incurred and the amount of such loss. In addition, the certification must warrant that arrangements have been made to ensure that there will be no foreign use of the dual consolidated loss and that the elector will be informed of any such foreign use. If applicable, the certification must include a notification that an excepted triggering event under of this section has occurred with respect to the dual consolidated loss within the taxable year being certified. If dual consolidated losses of more than one taxable year are subject to the rules of this , the certification for those years may be combined in a single document, but each dual consolidated loss must be separately identified. See for additional certifications required where taxpayers elect the stand-alone exception of .
(h) Recapture of dual consolidated loss and interest charge
(1) Presumptive rules
(i) Amount of recapture Except as otherwise provided in this section, upon the occurrence of a triggering event described in of this section that does not meet any of the exceptions provided in of this section, the dual resident corporation or domestic owner of the separate unit shall recapture as gross income the total amount of the dual consolidated loss to which the triggering event applies on its income tax return for the taxable year in which the triggering event occurs (or, when the triggering event is a foreign use of the dual consolidated loss, the taxable year that includes the last day of the foreign taxable year during which such foreign use occurs). See for rules with respect to the attribution of recapture income to a separate unit. See also Examples 38 through 40.
(ii) Interest charge In connection with the recapture, the elector shall pay an interest charge. An interest charge may be due even if the amount of recapture income is reduced to zero pursuant to of this section. See Example 39. Except as otherwise provided in this section, the amount of the interest shall be computed under the rules of section by treating the additional tax resulting from the recapture as though it had been due and unpaid as of the date for payment of the tax for the taxable year in which the taxpayer received a tax benefit from the dual consolidated loss. For purposes of this , a tax benefit shall be considered to have arisen in a taxable year in which the losses or deductions taken into account in computing the dual consolidated loss reduced U.S. taxable income. For the purpose of computing the interest charge, the additional tax resulting from the recapture is determined by treating the recapture income as the last income earned in the year of recapture. The interest shall be computed to the date for payment of the tax for the year of recapture and the interest thus computed becomes a part of the tax liability for that taxable year. See section for the computation of interest on a tax liability that it is not paid timely. The recapture interest charge shall be deductible to the same extent as interest under section .
(2) Reduction of presumptive recapture amount and presumptive interest charge
(i) Amount of recapture The dual resident corporation or domestic owner may recapture an amount less than the total dual consolidated loss if the elector demonstrates, to the satisfaction of the Commissioner, the lesser amount described in this . The reduction in the amount of recapture is the amount by which the dual consolidated loss would have offset other taxable income reported on a timely filed U.S. income tax return for any taxable year up to and including the taxable year of the triggering event (or, when the triggering event is a foreign use of the dual consolidated loss, the taxable year that includes the last day of the foreign taxable year during which such foreign use occurs) if no domestic use election had been made for the loss such that it was subject to the domestic use limitation of (and therefore subject to the limitation under ). For this purpose, the rules for attributing items of income, gain, deduction, and loss under shall apply. An elector using this rebuttal rule must prepare a separate accounting showing the income for each year that would have offset the dual resident corporation's or separate unit's recapture amount if no domestic use election had been made for the dual consolidated loss. The separate accounting must be signed under penalties of perjury by the person who signs the elector's tax return, must be labeled “Reduction of Recapture Amount” at the top of the page, and must indicate that it is submitted under the provisions of this . The accounting must be attached to, and filed by the due date (including extensions) of, the elector's income tax return for the taxable year in which the triggering event occurs. See Examples 38 through 40.
(ii) Interest charge The interest charge imposed under this section may be reduced if the elector demonstrates, to the satisfaction of the Commissioner, that the net interest owed would have been less than that provided in of this section if the elector had filed an amended return for the taxable year in which the recaptured dual consolidated loss was incurred, and for any other affected taxable years up to and including the taxable year of recapture, if no domestic use election had been made for the dual consolidated loss such that it had been subject to the restrictions of (and therefore subject to the limitations under ). An elector using this rebuttal rule must prepare a computation demonstrating the reduction in the net interest owed as a result of treating the dual consolidated loss as a loss subject to the restrictions of (and therefore subject to the limitations under ). The computation must be labeled “Reduction of Interest Charge” at the top of the page and must indicate that it is submitted under the provisions of this . The computation must be signed under penalties of perjury by the person who signs the elector's tax return, and must be attached to, and filed by the due date (including extensions) of, the elector's income tax return for the taxable year in which the triggering event occurs. See Examples 39 and 40.
(3) Rules regarding multiple-party event exceptions to triggering events
(i) Scope The rules of this apply when, after a triggering event described in of this section with respect to which the requirements of of this section were met (excepted event), a triggering event under of this section occurs, and no exception applies to such triggering event under of this section (subsequent triggering event). See Examples 36 and 37.
(ii) Original elector and prior subsequent electors not subject to recapture or interest charge
(A) Except to the extent otherwise provided in this , neither the original elector nor any prior subsequent elector shall be subject to the rules of this with respect to dual consolidated losses subject to the original domestic use agreement.
(B) In the case of a dual consolidated loss with respect to which multiple excepted events have occurred, only the subsequent elector that owns the dual resident corporation or separate unit at the time of the subsequent triggering event shall be subject to the recapture rules of this . For purposes of this , the term prior subsequent elector refers to all other subsequent electors.
(iii) Recapture tax amount and required statement
(A) In general If a subsequent triggering event occurs, the subsequent elector shall take into account the recapture tax amount as determined under of this section. The subsequent elector must prepare a statement that computes the recapture tax amount, as provided under of this section, with respect to the dual consolidated loss subject to the new domestic use agreement. This statement must be attached to, and filed by the due date (including extensions) of, the subsequent elector's income tax return for the taxable year in which the subsequent triggering event occurs (or, when the subsequent triggering event is a foreign use of the dual consolidated loss, the taxable year that includes the last day of the foreign taxable year during which such foreign use occurs). The statement must be signed under penalties of perjury by the person who signs the return. The statement must be labeled “Statement Identifying Liability” at the top and, in addition to the calculation of the recapture tax amount, must include the following items, in paragraphs labeled to correspond with the items set forth in through of this section:
(1) A statement that the document is submitted under the provisions of .
(2) A statement identifying the amount of the dual consolidated losses at issue and the taxable years in which they were used.
(3) The name, address, and taxpayer identification number of the original elector and all prior subsequent electors.
(B) Recapture tax amount The recapture tax amount equals the excess (if any) of—
(1) The income tax liability of the subsequent elector for the taxable year that includes the amount of recapture and related interest charge with respect to the dual consolidated losses that are recaptured as a result of the subsequent triggering event, as provided under and of this section; over
(2) The income tax liability of the subsequent elector for such taxable year, computed by excluding the amount of recapture and related interest charge described in of this section.
(iv) Tax assessment and collection procedures
(A) In general
(1) Subsequent elector An assessment identifying an income tax liability of the subsequent elector is considered an assessment of the recapture tax amount where the recapture tax amount is part of the income tax liability being assessed and the recapture tax amount is reflected in a statement attached to the subsequent elector's income tax return as provided under of this section.
(2) Original elector and prior subsequent electors The assessment of the recapture tax amount as set forth in of this section shall be considered as having been properly assessed as an income tax liability of the original elector and of each prior subsequent elector, if any. The date of such assessment shall be the date the income tax liability of the subsequent elector was properly assessed. The Commissioner may collect all or a portion of such recapture tax amount from the original elector and/or the prior subsequent electors under the circumstances set forth in of this section.
(B) Collection from original elector and prior subsequent electors; joint and several liability
(1) In general If the subsequent elector does not pay in full the income tax liability that includes a recapture tax amount, the Commissioner may collect that portion of the unpaid balance of such income tax liability attributable to the recapture tax amount in full or in part from the original elector and/or from any prior subsequent elector, provided that the following conditions are satisfied with respect to such elector:
(i) The Commissioner properly has assessed the recapture tax amount pursuant to of this section.
(ii) The Commissioner has issued a notice and demand for payment of the recapture tax amount to the subsequent elector in accordance with .
(iii) The subsequent elector has failed to pay all of the recapture tax amount by the date specified in such notice and demand.
(iv) The Commissioner has issued a notice and demand for payment of the unpaid portion of the recapture tax amount to the original elector, or prior subsequent elector (as the case may be), in accordance with .
(2) Joint and several liability The liability imposed under this on the original elector and each prior subsequent elector shall be joint and several.
(C) Allocation of partial payments of tax If the subsequent elector's income tax liability for a taxable period includes a recapture tax amount, and if such income tax liability is satisfied in part by payment, credit, or offset, such payment, credit or offset shall be allocated first to that portion of the income tax liability that is not attributable to the recapture tax amount, and then to that portion of the income tax liability that is attributable to the recapture tax amount.
(D) Refund If the Commissioner makes a refund of any income tax liability that includes a recapture tax amount, the Commissioner shall allocate and pay the refund to each elector who paid a portion of such income tax liability as follows:
(1) The Commissioner shall first determine the total amount of recapture tax paid by and/or collected from the original elector and from any prior subsequent electors. The Commissioner shall then allocate and pay such refund to the original elector and prior subsequent electors, with each such elector receiving an amount of such refund on a pro rata basis, not to exceed the amount of recapture tax paid by and/or collected from such elector.
(2) The Commissioner shall pay the balance of such refund, if any, to the subsequent elector.
(v) Definition of income tax liability Solely for purposes of of this section, the term income tax liability means the income tax liability imposed on a domestic corporation under title 26 of the United States Code for a taxable year, including additions to tax, additional amounts, penalties, and any interest charge related to such income tax liability.
(vi) Example See Example 36.
(4) Computation of taxable income in year of recapture
(i) Presumptive rule Except to the extent provided in of this section, for purposes of computing the taxable income for the year of recapture, no current, carryover or carryback losses may offset and absorb the recapture amount.
(ii) Exception to presumptive rule The recapture amount included in gross income may be offset and absorbed by that portion of the elector's net operating loss carryover that is attributable to the dual resident corporation or separate unit that incurred the dual consolidated loss being recaptured, if the elector demonstrates, to the satisfaction of the Commissioner, the amount of such portion of the carryover. The principles of shall apply for purposes of determining whether any portion of a net operating loss carryover is attributable to the dual resident corporation or separate unit. In the case of a separate unit, such determination shall be made by treating the separate unit as a domestic corporation and a member of the consolidated group composing its unaffiliated domestic owner, or members of the consolidated group of which its affiliated domestic owner is a member, as appropriate. An elector utilizing this rebuttal rule must prepare a computation demonstrating the amount of net operating loss carryover that, under this , may absorb the recapture amount included in gross income. Such computation must be signed under penalties of perjury and attached to and filed by the due date (including extensions) of, the income tax return for the taxable year in which the triggering event occurs (or, when the triggering event is a foreign use of the dual consolidated loss, the taxable year that includes the last day of the foreign taxable year during which such foreign use occurs).
(5) Character and source of recapture income The amount recaptured under this shall be treated as ordinary income. Except as provided in the prior sentence, such income shall be treated, as applicable, as income from the same source, having the same character, and falling within the same separate category, for all purposes, including sections and , to which the items of deduction or loss composing the dual consolidated loss were allocated and apportioned, as provided under sections , , , , , and the related regulations. For this determination, the pro rata computation of the items of deduction or loss composing the dual consolidated loss as described in shall apply. See Example 38.
(6) Reconstituted net operating loss
(i) General rule Except as provided in and of this section, commencing in the taxable year immediately following the year in which the dual consolidated loss is recaptured, the dual resident corporation, or the domestic owner of the separate unit, that incurred the dual consolidated loss that is recaptured shall be treated as having a net operating loss (reconstituted net operating loss) in an amount equal to the amount actually recaptured under this . If a domestic corporation (transferee) acquires the assets of the dual resident corporation or domestic owner in a transaction described in section , the preceding sentence shall be applied by treating the transferee as the dual resident corporation or domestic owner, as applicable. In a case to which this applies, the transferee corporation shall be treated as having a reconstituted net operating loss in an amount equal to the amount actually recaptured under this . In no event, however, shall more than one corporation be treated as having a reconstituted net operating loss as a result of a single dual consolidated loss being recaptured. A reconstituted net operating loss of a domestic owner shall be attributable under to the separate unit that incurred the dual consolidated loss that was recaptured. Moreover, a reconstituted net operating loss shall be subject to the domestic use limitation of (and therefore subject to the limitation under ), without regard to the exceptions contained in through of this section (relating to elective agreements in place between the United States and a foreign country, the ability to demonstrate no possibility of a foreign use, and a domestic use election, respectively). The reconstituted net operating loss shall be available only for carryover, under section , to taxable years following the taxable year of recapture. For purposes of determining the remaining carryover period, the reconstituted net operating loss shall be treated as if it had been recognized in the taxable year in which the dual consolidated loss that is the basis of the recapture amount was incurred. See Examples 36, 38, and 40.
(ii) Exception of this section shall not apply to the extent the dual consolidated loss that is the basis of the recapture amount would have been eliminated pursuant to if no domestic use election had been made for such loss. See Example 40.
(iii) Special rule for recapture following multiple-party event exception to a triggering event This paragraph applies to an excepted event described in of this section that is followed by a subsequent triggering event requiring recapture as described in of this section. In such a case, the domestic corporation that owns, directly or indirectly, the assets of the dual resident corporation, or the assets of or the interests in a separate unit, immediately following the excepted event shall be treated as if it incurred the dual consolidated loss that is recaptured for purposes of applying of this section. See Example 36.
(i) [Reserved]
(j) Termination of domestic use agreement and annual certifications
(1) Rebuttals, exceptions to triggering events, and recapture The domestic use agreement filed with respect to a dual consolidated loss shall terminate prior to the end of the certification period and have no further effect if—
(i) An elector is able to rebut the presumption of a triggering event pursuant to the general rule in of this section;
(ii) An event described in of this section is not a triggering event as a result of the application of paragraphs (f)(2)(i) or (ii) (relating to events requiring a new domestic use agreement) of this section; this does not, however, apply to terminate the new domestic use agreement filed in connection with the event pursuant to of this section. See also of this section regarding collection from the original elector and prior subsequent electors in certain cases; or
(iii) A dual consolidated loss is recaptured pursuant to of this section. See Examples 32 through 34.
(2) Termination of ability for foreign use
(i) In general A domestic use agreement filed with respect to a dual consolidated loss shall terminate and have no further effect as of the end of a taxable year if the elector—
(A) Demonstrates, to the satisfaction of the Commissioner, that as of the end of such taxable year no foreign use (as defined in ) of the dual consolidated loss can occur in any other year by any means; and
(B) Prepares a statement described in of this section that is attached to, and filed by the due date (including extensions) of, its U.S. income tax return for such taxable year.
(ii) Statement The statement described in this must be signed under penalties of perjury by the person who signs the return. The statement must be labeled “Termination of Ability for Foreign Use” at the top of the page and must include the following information, in paragraphs labeled to correspond with the following:
(A) A statement that the document is submitted under the provisions of of this section.
(B) The information required by of this section.
(C) A statement of the amount of the dual consolidated loss at issue and the year in which such dual consolidated loss was incurred.
(D) The information described in of this section that supports the conclusion that no foreign use can occur as provided in of this section.
(3) Agreements filed in connection with stand-alone exception See for the termination of domestic use agreements filed in connection with the stand-alone exception to the mirror legislation rule when a subsequent election is made under of this section (relating to agreements entered into between the United States and a foreign country).
[T.D. 9315, 72 FR 12914, Mar. 19, 2007, as amended by T.D. 9896, 85 FR 19855, Apr. 8, 2020]